E.ON investors begin to fret over Brazilian adventure

Wed Dec 18, 2013 4:00am EST

Related Topics

* Eike Batista's financial woes blight prospects

* Eneva shares down 77 percent since January 2012

* Follows E.ON's investment writedowns on European expansion

By Christoph Steitz

FRANKFURT, Dec 18 (Reuters) - Faced with radical green policies at home, German energy utility E.ON has turned to foreign markets again, but with its past mishaps abroad still fresh in the memory investors worry that its latest $1.3 billion investment in Brazil could prove at best ill-timed.

"You have to be careful not to get carried away by foreign markets," said Ingo Becker, European head of utility research at Kepler Cheuvreux.

"Thinking that the grass is greener somewhere else is not always a meaningful way of looking at things."

Six years ago it was a push into southern Europe which ended in grief for Chief Executive Johannes Teyssen's predecessor Wulf Bernotat.

Having lost out to Spain's Acciona and Italy's Enel in the takeover battle for Spanish utility Endesa in 2007, Bernotat went on a 11.5 billion-euro ($15.8 billion) acquisition spree, buying 12,200 megawatts (MW) of generation capacity, mainly in Spain, Italy and France.

That expansion back-fired with the credit crunch and ensuing sovereign debt crisis in Europe, forcing the company to book nearly 6 billion euros in writedowns as an expected surge in energy demand failed to materialise.

Looking for growth elsewhere instead, E.ON last year paid 850 million Brazilian reais ($366 million) for a 10 percent stake in power company MPX Energia, only to see the business empire of its newfound partner Eike Batista start to crumble and the economy to slow.

It then raised its stake in MPX to 37.9 percent as a result of Batista's economic woes, pumping in another 2.1 billion reais and renaming the company Eneva to distance it from the Brazilian tycoon, whose stake has been reduced to 24 percent.

Since January 2012, the month E.ON announced it's move on MPX, shares in Eneva have plunged 77 percent to 2.8 reais, while E.ON's shares are down 21 percent at 13.11 euros. In turn, the Stoxx 600 Europe utilities sector index is up 3 percent.

"It was probably too late for E.ON to enter Brazil. Now the business there is giving them a lot of headaches," said David Duchi, an analyst at Belgium's KBC Asset Management, which holds 0.13 percent of E.ON's shares.

BRAZILIAN BLUES

Following years of exuberant growth, Brazil's economy contracted in the third quarter for the first time since early 2009 as a steep drop in investment showed flagging confidence in what was one of the world's most attractive emerging markets.

While not breaking out results on Brazil, E.ON reported a loss at the EBITDA level in the first nine months of this year of 81 million euros for what it calls 'other non-EU countries', which groups its interests in Brazil and Turkey.

Including majority-owned power generator E.ON Russia , E.ON's non-European markets division as a whole accounts for about 6 percent of group EBITDA. In comparison non-European markets account for 25 percent of EBITDA at rival GDF Suez and about 43 percent at Iberdrola.

Asked to comment, E.ON said in an emailed statement, "the company continues to see Brazil as a highly interesting market where significant economic growth and increasing demand for energy can be expected."

SCOPE FOR TURNAROUND

But analysts said the outlook was still too uncertain to judge whether or when E.ON might be able to make a worthwhile return on its investment in Eneva.

"The decisive point is how long it will take E.ON's investment to generate profits. If you put earnings forecasts against their investment, it's clear it'll take a long time until the group will have earned it back," said one top-rated industry analyst, who declined to be named.

In the first nine months of 2013 Eneva made a loss at the EBITDA level of 165 million reais and a net loss of 662 million reais, mainly due to delays in getting new plants running.

"Eneva suffered from a poor operational performance leading to the need to buy expensive power on the market to honour contracts," HSBC analysts said, but adding that most of the operational problems appear to have been solved.

As a result analysts expect the company, which operates 2,400 MW of installed capacity with a further 524 MW under construction, to make a net loss in the full year of 666 million reais, followed by a profit of 156 million reais next year and 280 million reais in 2015, according to Thomson Reuters StarMine.

They also expect Eneva's return on equity (ROE) to be a negative -2.5 percent this year but to climb to 1.5 percent next year and 7.4 percent in 2015, according to StarMine.

Meanwhile Goldman Sachs expects Eneva's cash return on capital invested (CROCI) to build up from 0.4 pct in 2013 to 10.8 pct in 2014 and 11.1 pct in 2015.

"We believe the level of visibility of the company's recurring EBITDA and free cash flow should improve in the next 12-months," the bank said in a note published in September. ($1=2.3204 Brazilian reais) ($1=0.7271 euros) (Additional reporting by Geert De Clercq in Paris; Editing by Greg Mahlich)

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